12/12/2005 @ 12:00AM

Do Solar While the Credit Shines

Thinking of picking up a photovoltaic panel? Install it before the lavish tax subsidies expire.

A front porch with hanging flower baskets and stone-based columns softens the modern look of Bronwen and Jeffrey Martin’s 4,600-square-foot home in Mooresville, N.C. But in back there’s no confusing this $1.2 million structure with its more traditional neighbors: The rear south-facing glassy roof has two top rows of solar thermal panels that heat the house and its water and three bottom rows of solar photovoltaic panels that generate its electricity. “We have essentially locked in our future energy costs. And we can take hot showers forever,” boasts Jeff Martin, a 38-year-old senior program manager at Microsoft. Adding to his solar bliss: $17,500 in state tax credits.

Solar power is hotter than it has been since the 1970s. Only now the technology is better and the tax incentives fatter. Many states dish out money for these toys. Congress recently adopted the first federal tax breaks for residential solar since 1985–temporary credits available for systems installed in 2006 or 2007. You can claim one federal credit of up to $2,000 to cover 30% of a photovoltaic system’s cost and another 30% credit of up to $2,000 for a thermal system. These are credits–not deductions–so they reduce your tax bill dollar for dollar.

Catches? The federal credit applies only to your net system cost after state incentives. Thermal systems used for heating hot tubs and pools aren’t eligible. And there’s a chance you could lose your credit, or part of it, to the alternative minimum tax. So consult your accountant as well as a solar contractor before you decide whether to go solar.

Even with the federal break, the financial (as opposed to the feel-good) case for solar varies with latitude, utility rates and state subsidies. Over the course of a year the Southwest receives double the amount of solar energy that the Northeast does, but that usually translates into somewhat less than double the solar system output because the material converting the sunlight to electricity actually becomes less efficient at higher temperatures. Utility costs are widely skewed and can easily offset differences in climate. A photovoltaic system installed in Boston produces 25% less electricity than it would in Albuquerque, N.M. but yields the same savings on utility bills, since electricity costs more in Boston. (The tips on page 194 will help you figure your own likely payoff.)

Fifteen states, including Iowa, North Carolina and Oregon, offer tax breaks for solar energy. New York allows you to claim a tax credit equal to 25% of the cost of solar thermal and photovoltaic systems, with a maximum credit of $3,750. (That increases to $5,000 on Sept. 1, 2006). The state exempts solar systems from sales tax and gives homeowners a 15-year real property tax exemption on the improvement.

In two dozen states, state or local governments offer direct solar rebates. Connecticut pays homeowners $5 per watt to install solar electricity–up to $25,000 for a 5-kilowatt photovoltaic system. (As is customary, power is figured with the sun high in the sky on a cloudless day. But the sun goes down frequently. A 5kw system in Hartford will produce only 6,000 kilowatt-hours a year.) That system would cost $37,800. The state rebate reduces the cost to $12,800. The federal break, assuming you can claim it, knocks the cost down to $10,800. If the local utility charges 14 cents a kilowatt-hour and raises rates 5% a year, a family using 10,000 kilowatt-hours a year should recover its $10,800 investment in 11 years, calculates Thomas Leyden, a vice president of PowerLight, a photovoltaic project developer in Berkeley, Calif. (The panels should last for at least 25 years.)

In New Jersey you could recoup your investment in five years. In addition to a state $5.10-per-watt rebate and an exemption from the 6% sales tax, a New Jersey utility (or a middleman broker) will pay you 15 cents a kilowatt-hour for the “renewable energy credits” you earn as a solar energy producer–a subsidy worth $887 a year for our hypothetical family. This boondoggle comes courtesy of New Jersey lawmakers, who mandated that electric utilities either draw a certain amount of their power from green sources or buy credits to meet their quotas. As more systems are put in, the market rate for credits could fall.

Even after all the breaks, upfront costs can be substantial, particularly if you’re set on being energy self-sufficient. The Martins in North Carolina spent $100,000 for a 10-kilowatt photovoltaic system and another $20,000 for the thermal system. (A thermal system uses the sun’s rays to warm water, either for use at the tap or in a heating system.) They also shelled out $10,000 for a geothermal heat pump system that provides cooling (and back-up heating) by using a deepwater well. Of course, they didn’t make cost-saving a priority. Instead, working with noted Massachusetts architect/engineer Steven Strong (who designed the solar energy systems at the White House), Jeff Martin wanted, he says, “a demonstration of what’s possible.”

If you’ve got Martin’s green impulses but can’t cash out Microsoft stock options to finance a project, consider a modest system and rely more on conventional power as a backup. The most economic solar investment for an existing home is a system that heats water for your tap and costs $3,500 to $5,000. Fluid runs through pipes that circle up to the solar roof panels. The hot fluid then transports heat back down to an 80-gallon water storage tank. (The Martins, who use solar-heated water for central heating, too, have a 1,000-gallon tank in their cavernous basement.)

A typical family of four uses 64 gallons of hot tap water a day. If you buy a $4,500 solar water heating system in North Carolina, the net cost after state and federal credits is $2,170. If gas averages $20 per million Btu and the solar system cuts your gas use by 15 million Btu a year, the system pays for itself in seven years. You’ll want to keep your old electric or gas system in place as a backup.

The federal $2,000 credit by itself doesn’t make a big dent in the far greater cost of a photovoltaic system, so you’ll need a generous state incentive to make that investment pay off. How much do you care about aesthetics? Those old-fashioned, clunky panels that sit in your yard or on your roof are cheaper than the sleek, roof-integrated panels the Martins chose or new ones that double as windows.

The Martins set up their system so that it fulfills most of their electricity demands over the course of the year. A bank of batteries in their basement stores power for when the sun doesn’t shine and the power grid isn’t available. The excess that they can’t use or store is sold to the local power grid. Under a statewide program they get 18 cents a kilowatt-hour for the power they put on the grid, which is then resold to other consumers who are willing to pay 12 cents a kilowatt-hour (4 cents more than the normal rate there) to buy a mix of green power that includes pricey solar and cheaper wind and methane energy. The Martins could even engineer their system to sell all of their solar power on the grid at 18 cents and then buy back fossil-fuel power at 8 cents, pocketing the difference. Of course, it would be cynical to play arbitrage games like that, but then legislators were inviting such mischief when they decided to subsidize something that doesn’t quite make economic sense.